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Sutherland v. Sutherland, Del. Ch., C.A. No. 2399-VCL, Lamb,V.C., mem. op. (March 23, 2009)

March 23, 2009

In this decision, the Court of Chancery considered a motion to dismiss a complaint alleging breaches of fiduciary duty and waste. In dismissing the complaint in part, the Court rejected defendants’ arguments that an exculpatory charter provision sterilized director interest in approving self-dealing transactions. Finding that the defendant’s interpretation of the relevant charter provision was contrary to established Delaware law, the Court denied the motion to dismiss with respect to plaintiff’s timely claims.

Dardanelle Timber Company, Inc. (“Dardanelle”), a closely-held corporation, together with its whollyowned subsidiary, Sutherland Lumber-Southwest, Inc. (“Southwest,” and together with Dardanelle, the “Companies”), operate retail lumber yards and stores. Defendants Perry and Todd Sutherland constitute a majority of the three-member board of directors of each Company, serve as the principle officers of both Companies and each own (together with their respective families) 25% of the common stock of Dardanelle. Plaintiff, Martha Sutherland, is a former director of Southwest and a Dardanelle stockholder. Following the Court of Chancery’s denial of a motion to dismiss plaintiff’s original Section 220 action, plaintiff amended her complaint to allege (i) derivative claims on behalf of Dardanelle for breach of fiduciary duty, (ii) waste, and (iii) double derivative claims on behalf of Southwest for breach of fiduciary duty. In particular, plaintiff alleged that the defendant directors used the Companies’ funds and assets for their personal benefit and approved employment agreements granting themselves purportedly excessive compensation.

In support of their motion to dismiss for failure to state a claim, the defendants relied upon exculpatory charter provisions that provided, in pertinent part, that “[a]ny director ... may be a party to or may be peculiarly or otherwise interested in any contract or transaction of the corporation, provided that the fact that he ... is so interested shall be disclosed or shall have been known to the board of directors, or a majority thereof; and any director of the corporation, who is ... so interested, may be counted in determining the existence of a quorum ... and may vote thereat ... as if he were not ... so interested.” Vice Chancellor Lamb observed that, consistent with Sterling v. Mayflower Hotel Corp., 93 A.2d 107 (Del. 1952), such provision removes a director’s disability to participate in a quorum to vote on an interested transaction, but does not sanitize disloyal transactions. Mem. op. at 9, n.12, 13. Vice Chancellor Lamb further suggested that if defendants’ interpretation of the provision were correct, it would immunize all interested transactions from entire fairness analysis and eviscerate the duty of loyalty and the prohibition in Section 102(b)(7) of the General Corporation Law against limiting the personal liability of directors for money damages in a suit for breach of the duty of loyalty. Thus, the Court concluded that the exculpatory provision, if construed in the manner proposed by defendants, would be unenforceable under Delaware law and could not form the basis for a dismissal. Moreover, because none of the Section 144 safe-harbor provisions were present, the challenged transactions were not insulated on grounds of unfairness. The Court did, however, find that plaintiff’s claims were time-barred in respect of any transactions occurring more than three years prior to the commencement of the Section 220 action. Although a three year statute of limitations applied in this case, it was tolled during the pendency of plaintiff’s Section 220 action and during the 4 month period between the entry of judgment in respect of such Section 220 action and the commencement of the instant action.

The full opinion is available here